• Asia-Pacific Journal of Business
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• v.14 no.4
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• pp.255-273
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• 2023

Purpose - This study examines whether internal control has an effect on stock price informativeness about future earnings. High quality internal control provides continuous assurance for the quality of financial reports, and these future earnings-related information is accurately reflected in the current stock price. Design/methodology/approach - This study collected 12,862 data from 2006 to 2021 in China to make an empirical analysis using the future earnings response coefficient (FERC) and the multiple regression analysis were hired in order to analyze the data. Findings - We find that internal control strengthens the association between current returns and future earnings, indicating that more information about future earnings is reflected in current stock prices. This positive effect exists in both the main board market and the growth enterprise market of China's stock market, especially in the main board market after the implementation of the internal control policy. In addition, we find that the positive effect is weaker for firms that report internal control deficiencies or receives non unqualified internal control audit opinions. The results using earnings persistence yield similar findings, further supporting the results based on the FERC model. Research Implications or Originality - Our tests provide strong evidence that the quality of internal control affects FERC in China stock market.

• Asia-Pacific Journal of Business
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• v.13 no.4
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• pp.109-121
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• 2022

Purpose - This study investigates how earnings volatility influences current stock price informativeness about expectations of future earnings. Design/methodology/approach - I adopt the FERC model developed by Collins et al. (1994) and modified by Lundholm and Myers (2002) to investigate the connection between earnings volatility and future earnings reflected in current returns. I define five-year rolling standard deviations of earnings and components as earnings volatility measures and the degree of deviation of earnings from cash flows over the same five-year, which is developed by Jayaraman (2008). Finding - My results show that earnings volatility delays current stock price response to future operation expectations. They also verify that as earnings are more divergent from cash flows, current returns are less timely incorporating value-relevant future operation. Research implications or Originality This study shows that when volatile earnings deliver obscure and unreliable information about future operation expectations, they cause the market to be conflicting in understandings their implications and make it difficult in attaining correct future cashflow estimates.

• Management & Information Systems Review
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• v.35 no.4
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• pp.123-140
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• 2016

This study investigates whether tax subsidy is associated with the information effect of future earnings (Future Earnings Response Coefficient, hereafter 'FERC'). Prior studies related with tax subsidy suggest that high- tax subsidy is associated with high-Conservatism. And high-tax subsidy is associated with low-information asymmetry. The hypothesis is tested by using sample firms listed on the Korean Stock Exchange from the year of 2002 to the year of 2009 inclusively. We followed methodology of Tucker and Zarowin (2006). We find that the regression coefficient for tax $subsidy{\times}X_{t3}$ shows a significant positive sign. Also, we performed additional test after controlling for variables related with FERC. The regression coefficient for tax $subsidy{\times}X_{t3}$ is consistent with main results. This result means that the changes in the current stock price of higher-tax subsidy contain more information about their future earnings than the changes in the stock price of lower-abnormal audit hours. The evidence suggests that investors positively understand high-tax subsidy.